The 10 worst states for retirees in 2012

By Robert Powell

Published: Jan 11, 2012 9:45 am ET

They may look like havens but taxes, cost of living a burden

BOSTON (MarketWatch) — If you live in Illinois, we have some good news for you. You no longer live in the absolute worst state in which to retire. The bad news? You live in the second-worst state, according to research released Wednesday by TopRetirements.com. Connecticut now has the dubious honor of being the worst state to spend your golden years, according to John Brady, the president of TopRetirements.com who by odd coincidence also lives in Connecticut. “The Nutmeg State does have considerable charm and some terrific places to live, if you can afford to live here,” said Brady. (Left: Granby, Conn.)

No. 2: Illinois. Now truth be told, Brady said Illinois actually tied Connecticut as being the worst state in his research. But ultimately Connecticut earned the inglorious honor of being the worst place for retirees; its property taxes, personal income taxes, and cost of living are higher than that of Illinois.But Illinois has plenty of woe: “Its pension funding, deficit spending, unemployment, and foreclosure rates are among the worst of any states,” Brady said. (Left: Chicago)

No. 3: Rhode Island. This year, Brady expanded the number of factors he evaluates to five; the state’s fiscal health, property taxes, state income tax, cost of living and climate. Now, he readily admits that you have to establish your own criteria for identifying the best or worst state for your retirement, but these factors represent what is likely to be important to most people. For Rhode Island, its high taxes outweighed the great places to live along its extensive coastline and numerous bays and harbors. (Left: Newport, R.I., waterfront.)

No. 4: Vermont. According to Brady, some states are spending more money than they take in and are in serious trouble. To evaluate a state’s fiscal health, Brady examined the state’s deficit, unfunded pension liabilities, unemployment rates and foreclosures. Those four factors combined added up to a maximum of one point in the rankings. In Vermont, high income and property taxes pose the biggest problem. (Left: Pico ski area near Killington, Vt.)

No. 5: Massachusetts. Among the taxes you might face in retirement, property taxes are usually the most oppressive for retirees, Brady said. According to the Consumer Expenditure Survey, for instance, the average American 65 and older pays $1,919 in property taxes, which represents 4.6% of the average income ($41,286) for that cohort. By contrast, the average American age 55 to 64 has income of $68,906 and pays $2,216 in property taxes. That represents just 3.2% of their income. For his research, the 10 states with the highest property taxes were awarded one point on a sliding scale. Property taxes are the big curse for Massachusetts residents. (Left: Boston.)

No. 6: New Jersey. New Jersey, which has the highest median property taxes in the country earned, 1.1 points on the tax scale. “The median property tax in the Garden State is the highest in the U.S. at $6,579. It also has the highest tax burden (as reported by the Tax Foundation), a large budget deficit issue, and very high cost of living,” Brady said. “On the plus side, it excludes most pension and Social Security income for couples making less than $100,000.” (Left: Crystal Point condominium development on the Jersey City, N.J. waterfront.)

No. 7: Minnesota. When you look at the various sources of income for the average American age 65 and older, you’ll note at least one interesting fact: Earned income represents nearly 28% of total income for the average American age 65 and older. By contrast, Social Security represents nearly 37% of total income. In other words, two thirds of total income comes from two sources — work and Social Security. That means, where you live while you work after age 65 could make a big difference in your take-home pay. For his study, Brady created a hypothetical couple that had $70,000 in income from Social Security, earnings, pensions and retirement savings. The 10 states with the highest taxes on earned income earned up to one negative point. Minnesota hits residents with the fourth-highest income tax in the country. (Left: Pose Lake in the Boundary Waters wilderness area of Minnesota.)

No. 8: New York. Make no mistake about it, the higher the cost of living, the lower your potential standard of living. For his research, Brady awarded states with the highest cost of living one negative point. “Surprisingly, New York did not earn any negative points for income taxes, since it offers generous exemptions for Social Security, pensions, along with a high standard deduction,” Brady said. It is, however, an expensive place to live; it ranks as the fourth costliest state in the country just behind Hawaii, Washington, D.C., and Alaska. (Left: Times Square.)

No. 9: Maine. If you’re like most retirees, you probably want to live where it’s warm in the winters. That means states north of the Mason-Dixon line get a negative one point. And Maine is about as far north as you can get. (Left: Cutler, Maine.)

No. 10: Wisconsin. So where does that leave us? Essentially, with a list dominated by states in the Northeast and Midwest. What’s important to note is that this year’s list is slightly different from last year’s list. New to the list are Vermont, Minnesota and Maine. States lucky enough to leave the list are Ohio, Nevada and California, which Brady says is more a reflection of changes to the TopRetirements.com rating system. (Left: A Wisconsin dairy farm.)